Research
Research
(joint with Simon Fuchs, KC Pringle, and Michael Dwight Sparks) Policy Hub, Federal Reserve Bank of Atlanta, Feb 28, 2025
In the news: AJC, Atlanta News First, Bloomberg, Breitbart, CBS News, MNI
Abstract: We evaluate the impact of various US tariff scenarios on consumer prices using novel micro-level data linking imports to consumer expenditures. Results indicate that an additional 10 percent tariff on Chinese imports, 25 percent tariffs on Canadian and Mexican imports, and 10 percent tariff on other countries could raise consumer prices on everyday retail purchases, such as food and beverage items and general merchandise, covering about a quarter of the total consumption basket, by 0.81 percent to 1.63 percent, assuming half to full pass-through. Notably, tariffs on Canada and Mexico contribute approximately 45 percent of the total price effect. Our results focus on direct effects of tariffs on a quarter of the total consumption basket, and the aggregate effect on the overall Consumer Price Index (CPI) further hinges on the price sensitivity of the excluded consumption categories, particularly transportation, services, energy, and housing
"The Expansion of Product Varieties in the New Age of Advertising"
(joint with Jeremy Greenwood, Ricardo Marto, and Sara Moreira) Review of Economic Dynamics, 2023, vol. 50, 171-210
Abstract: The last decades have seen large improvements in advertising technology that allowed firms to better target specific consumers. This paper studies the relationship between advertising, the rise of product varieties, and economic growth. We develop a model of advertising and product varieties where firms choose the intensity of digital ads targeted at specific consumers and traditional ads that are undirected. The calibrated model shows that improvements in advertising technology have driven the rise in product varieties over time. We provide causal empirical evidence of the mechanism at play using detailed micro data on firms’ products and advertising choices for the 1995-2015 period and exogenous variation in consumers’ differential access to the internet.
(joint with Camelia Minoiu, Veronika Penciakova, and Jon Willis ) Policy Hub, Federal Reserve Bank of Atlanta, Sep 25, 2023
Abstract: Small and medium-sized enterprises (SMEs) made outsized contributions to net employment growth during the pandemic recession and recovery. However, credit conditions have tightened significantly during the past year and might hinder growth for small firms going forward. Using data on bank lending to small businesses and employment growth, we estimate that a tightening in bank credit supply of 1 percentage point is associated with an 11 percent decline in SMEs' net job creation rate. This estimate indicates that a bank credit tightening about one-third the size of the tightening observed during the Great Recession would reduce overall net job creation by approximately 285,000 jobs between March 2023 and March 2024.
"Connecting to Power: Political Connections, Innovation, and Firm Dynamics"
(joint with Ufuk Akcigit and Francesca Lotti) Econometrica, 2023, Volume 91, Issue 2. Online Appendix
Read more : The Economist, BFI Brief, VOX.EU, Harvard Business Review, ProMarket, Microeconomic Insights
Abstract: How do political connections affect firm dynamics, innovation, and creative destruction? To answer this question, we build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model generates a number of theoretical testable predictions and highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. We test the predictions of our model using a brand-new dataset on Italian firms and their workers, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: when compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design.
"Barriers to Creative Destruction: Large Firms and Non-Productive Strategies"
Book chapter in The Economics of Creative Destruction: New Research on Themes from Aghion and Howitt, Harvard University Press, 2023.
CEPR DP165570; FRB Atlanta WP 2021-23 Short summary here: Faculti
Abstract: This chapter reviews recent empirical evidence on large firms’ use of non-productive strategies that hinder creative destruction and reallocation. The focus is on three types of non-productive strategies: political connections, non-productive patenting, and anti-competitive acquisitions. The studies analyzing granular micro data sets from different contexts show that as firms gain market share, they tend to rely more on non-productive strategies to hold their dominant market positions while curtailing their use of productive, innovation-based growth strategies. Theoretical channels, aggregate implications, and some potential for policy are discussed.
Comment on ``Does the Cream Always Rise to the Top? The Misallocation of Talent in Innovation"
Journal of Monetary Economics, 2023, vol. 133(C), pages 129-131.
“Taxation and the International Mobility of Inventors”
American Economic Review, 2016, 106 (10): 2930-2981. Online Appendix
(joint with Ufuk Akcigit and Stefanie Stantcheva)
Read more: The Telegraph, VOX.EU, NBER Digest
Abstract: We study the effect of top tax rates on "superstar" inventors' international mobility since 1977, using panel data on inventors from the U.S. and European Patent Offices. We exploit the differential impact of changes in top tax rates on inventors of different qualities. Superstar inventors' location choices are significantly affected by top tax rates. In our preferred specification, the elasticity to the net-of-tax rate of the number of domestic superstar inventors is around 0.03, while that of foreign superstar inventors is around 1. These elasticities are larger for inventors in multinational companies. An inventor is less sensitive to taxes in a country if his company performs a higher share of its research there.
"The Price of Delay: Supply Chain Disruptions and Pricing Dynamics" [New!]
CEPR Discussion Paper No. DP20589 CESifo Working Paper Series 12079
(joint with Simon Fuchs) The Armen Alchian Best Paper Award by the Armenian Economic Association, 2025
Abstract: We study the role of supply chain disruptions in shaping consumer prices, focusing on both firms’ own import shocks and strategic responses to competitors’ disruptions. Using a newly constructed micro-level dataset that links transaction-level U.S. import data from Bills of Lading with high-frequency consumer prices and sales from a consumer panel, we develop a novel approach to estimate the price effects of cost shocks and product availability. Motivated by a model of delivery delays, cost shocks, and firm pricing, we implement a shift-share identification strategy based on delivery shortfalls, port congestion, and freight and import costs. We find sizable pass-through elasticities: firms raise prices in response to higher import costs and delivery delays, especially when disruptions persist. We also identify strategic pricing: firms—including non-importers—increase prices in response to competitors’ supply chain disruptions. Using our estimates and back-of-the-envelope calculations from the model, we show that strategic interactions significantly amplified the direct effects of supply chain shocks on consumer prices during the pandemic.
"Patents to Products: Product Innovation and Firm Dynamics" [New version!]
CEPR Discussion Paper No. DP14692 FRB Atlanta WP No. 2020-4
(joint with David Argente, Douglas Hanley, and Sara Moreira) Reject and Resubmit, QJE
Read more at VOX.EU New Things Under the Sun
Abstract: We combine NielsenIQ scanner data with USPTO patent records and apply natural language processing to match detailed product descriptions to patent texts for the consumer goods sector. We show that while more than half of product innovations originate from non-patenting firms, patent filings are on average followed by subsequent product introductions. Yet this relationship weakens with firm size. Patents held by market leaders also yield revenue premiums beyond what can be explained by their own product introductions and are associated with stronger deterrence of competitors' innovations. To interpret these findings, we develop a simple growth model in which larger firms have stronger incentives to engage in strategic patenting---filing for protection rather than market innovation---which dampens innovation and slows creative destruction.
"Foundational Processes and Growth"
CEPR Discussion Paper No. DP19858 FRB Atlanta WP No. 2025-1
(joint with Leo Liu, Elvira Sojli, Wing Wah Tham) Accepted, JFE
Abstract: This paper studies the interaction between process and product innovations and their distinct role in firm growth dynamics. We differentiate empirically and theoretically two types of process innovations: foundational processes that advance production technology and cost-reducing processes that enhance existing production efficiency. We develop an innovation model of product varieties with quality heterogeneity to illustrate how these innovations impact firm growth differently and highlight how process innovation induces product innovation. By analyzing millions of patent texts from 1900 to 2020, we classify innovations into product, cost-reducing process, and foundational process innovations. We find that foundational processes lead to sustained firm growth, especially through their effect on subsequent product creation. R&D-intensive firms focused on "deep-tech" innovations have an advantage in creating foundational processes, resulting in superior product quality. Using patents linked to FDA-approved drugs, we show that firms with a comparative advantage in creating foundational processes, due to greater knowledge and technological stock, tend to produce higher-value products.
“Entrepreneurship through Employee Mobility, Innovation, and Growth”
(joint with Ia Vardishvili)
FRB Atlanta WP No. 2022-10
For more, listen to the podcast on the Economy Matters!
Cited in the FTC final Noncompete Rule
Abstract: Firm-level productivity differences are big and are largely ascribed to ex-ante heterogeneity in the entrepreneurs' growth potential at birth. Where do these ex-ante differences come from, and what can the policy do to encourage the entry of high-growth entrepreneurs? We study empirically and by means of a quantitative growth model the \textit{spinout} firms -– the firms founded by former employees of the incumbent firms. By focusing on innovating spinouts identified through inventor mobility in the patent data, we establish three core facts: (i) spinouts outperform regular entrants over their lifecycle; (ii) firms with greater technological lead generate more successful spinouts; and (iii) parent firms experience a persistent decline in innovation following spinout events. Motivated by these findings, we develop a structural model of innovation and firm dynamics in which heterogeneous spinouts endogenously emerge from employee decisions. Spinouts influence growth through four channels: direct entry, incumbent disincentives, knowledge diffusion, and firm composition. Growth decompositions reveal that spinout dynamics are quantitatively important for aggregate innovation and growth. We find that stricter non-compete laws reduce spinout formation, dampening innovation and growth.
“The Role of the IT Revolution in Knowledge Diffusion, Innovation and Reallocation”
Abstract: What is the impact of information and communications technologies (ICT) on innovation, competition, and sectoral reallocation? In this paper, I analyze the impact of ICT through facilitating knowledge diffusion in the economy. There are two opposing effects. The increased flow of ideas between firms and industries improves learning opportunities and spurs innovation. However, knowledge diffusion through ICT also results in broader accessibility of knowledge by competitors, reducing expected returns from research efforts and hence harming innovation incentives. The nature of the tradeoff between these opposing forces depends on an industry's technological characteristics, which I call “external knowledge dependence”. Industries whose innovations rely more on external knowledge benefit greatly from knowledge externalities and expand, while more self-contained industries are more affected by intensified competition and shrink. This results in the reallocation of innovation and production activities toward more externally- focused, “knowledge-hungry” industries. I develop a model of innovation and firm dynamics, which features this mechanism. Next, using NBER patent and citations data together with BEA industry-level data on ICT, I empirically validate the mechanism of the paper. First, using citations data, I define the index of industries' external dependence. Next, I document that ICT is strongly associated with higher level of knowledge recombinations from different technology classes; and that industries that are more externally dependent benefit from the IT revolution more. Quantitative analysis from the calibrated model illustrates that it is important to account for both technological heterogeneity and the knowledge-diffusion role of ICT to explain U.S. trends in productivity growth and sectoral reallocation in recent decades.
"Imitation, Innovation, and Technological Complexity: Foreign Knowledge Spillovers in China"
(joint with Felipe Saffie and Pengfei Han)
Abstract: In the last two decades, the world has witnessed the rise of Chinese innovation. China, once a manufacturing hub for the West, has become a major player in the development of many new technologies. We assess how foreign knowledge spillovers spurred this transformation. To this end, we assemble a rich micro-level data set of firm patenting and accounting information. The aggregate data show that over time Chinese firms have gained leadership over foreign firms in China both in terms of production and patenting. Nevertheless, the aggregate trends mask rich industry heterogeneity pointing to the limits of cross-firm knowledge spillovers. While foreign firms have lost market leadership in low-tech (simple) industries, they have maintained strong leadership in high-tech (complex) industries. Exploring foreign knowledge spillovers using patent citations data, we show that only firms in low-tech (simple) industries eventually decrease their reliance on foreign knowledge for innovation. Our findings suggest that imitation is a path to indigenous innovation only in low-tech (simple) industries and point to the need of industry-specific policies.
"Ownership, Control, and Firm Dynamics: Evidence from Italian Earthquakes"
(joint with Viktar Fedaseyeu and Francesca Lotti).
(joint with Ivane Kiguradze). Differential Equations, 2006, Vol. 42, No. 2, pp. 165-171.